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January 2, 2007

New Morgan Stanley Dark Liquidity Pool Goes Live

By Nina Mehta

At a time when most bulge-bracket firms are rolling out their first internal crossing system, Morgan Stanley has quietly launched its second. Called MS Pool, the alternative trading system matches orders on a continuous and anonymous basis. It went live in September.

"Whenever we can give clients liquidity, anonymity, lower cost and price improvement, that's a good equation," says Bill Neuberger, managing director and head of product development for electronic trading at Morgan Stanley.

MS Pool brings together orders from Morgan Stanley's retail, institutional and broker-dealer clients, as well as algorithmic flow and orders from the firm's internal trading desks. The latter include the cash, program and proprietary desks. Customers can opt out of trading against flow from these desks in MS Pool.

Morgan Stanley guarantees users of MS Pool that all orders matched will be price-improved-that is, buyers will pay less than the market's best offer and sellers will receive more than the market's best bid. If the spread is a penny wide, trades execute automatically at the midpoint.

The average print size is currently under 500 shares, although block trades have been printed. Customers can specify minimum cross sizes to avoid executing against smaller orders. "The goal isn't to do blocks on MS Pool, but it doesn't preclude blocks," Neuberger says.

Unlike some crossing systems, Neuberger stresses, MS Pool does not announce the names in which it was active at the end of the day. "That could be information leakage," he says. "The trade might not be over and there could be interest in it the next day."

He adds: "We want our crossing system to be anonymous, benign, and ungameable." Neuberger predicts that MS Pool will attain a cross rate of 5 percent to 6 percent.

That's similar to the cross rate on Morgan Stanley's original crossing system, launched in 1999. Known informally as ATS1, the system crosses algorithmic orders at the volume-weighted average price for particular time intervals. That flow comes through Passport (Morgan Stanley's electronic trading portal), FIX connections, and third-party order management systems, as well as the firm's internal desks. Customers can opt out of crossing against Morgan Stanley flow.

Algorithmic orders that go through Morgan Stanley's ATS1 and do not execute will now pass through MS Pool. Direct market access orders will go through MS Pool before being sent to other execution venues.